HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) is up about 1% in trading today despite reporting falling profits that came in short of consensus for 1H14. Profit before taxes was $5.6 billion compared to the $6.2 billion Bloomberg consensus as falling net interest margins (NIM) and exposure to global markets took their toll. HSBC stock is the second best performing among major UK bank’s YTD behind Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS).
“Trading on 1.3x 2014/15e tNAV, HSBC continues to enjoy a premium rating relative to UK peers, yet we do not currently expect it to achieve a RoE>CoE until 2018e. As such, given broad sector weakness, we now see better value in Barclays (Buy), Lloyds (Buy) and Standard Chartered (Buy). We prefer HSBC to RBS (Sell),” writes Investec analyst Ian Gordon, who rates HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) as Hold with a 620p price target (currently 633p).
Net interest margin continues its nine year decline
Net interest margin fell to 1.95%, continuing its nine year decline from 3.08% in 2005, a trend that will make it difficult for HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) to pull net interest income up in the near future, and weak loan growth meant that NII fell to $8.7 billion for the half.
Global Banking and Markets, which accounted for 41% of HSBC Holdings plc’s (ADR) (NYSE:HSBC) (LON:HSBA) profit before taxes, fell 10% quarter-on-quarter and 4% year-on-year in line with Investec expectations. Gordon argues that this is a reasonably good result compared to the rest of the industry, but that the bank’s reliance on global markets will limit its growth in the next few years and that it makes a possible hard landing in China even more of a danger for HSBC investors.
Falling impairments a bright spot for HSBC
The good news is that HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) has brought its 1H14 impairments down to the lowest point since before the crisis. Second quarter impairments were actually up 31% from 1Q14, reaching $1 billion, but that’s still down 46% from 2Q13.
HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) has also strengthened its capital structure to the point that Gordon thinks it could start to act as a drag on the company. “In our view, HSBC’s capital strength is not in doubt. The real question is how far beyond 12% it may be compelled to build, with consequential RoE dilution,” he writes.